During the second quarter of 2017, purchase originations jumped significantly even as refinances shrank, according to Black Knight Financial Services' latest Mortgage Monitor report.
First lien mortgages jumped 20% from the first quarter and 16% from last year to $467 billion in the second quarter. During the second quarter, refis fell 20%, or $37 billion, from the second quarter to 31% of the market share of originations, the lowest level in 16 years.
However, the 57% quarterly surge in purchase originations more than made up for the fall in refis. This is an increase of 6% from last year to $321 billion, the highest level since 2007.
But while purchase lending is up significantly, Black Knight explained the lending market is still performing below its peak capacity.
“While overall purchase origination volumes are strong from a total dollar amount perspective, the market still does not appear to be performing at peak capacity,” said Ben Graboske, Black Knight Data and Analytics executive vice president. “One key cause is the more stringent purchase lending credit requirements enacted in response to the financial crisis. Consider that borrowers with credit scores of 720 or higher accounted for 74% of all Q2 2017 purchase loans as compared to a pre-crisis average of 47%.”
“Today, there are 65% fewer purchase loans being originated to borrowers with credit scores below 720 than in those years,” Graboske said. “The lack of credit availability for those borrowers is causing a strong headwind for the purchase market. Using 2000 to 2003 averages as a measure, as many as 645,000 purchase loans were not originated in Q2 due to tighter lending standards.”
He explained the purchase market is operating at less than two-thirds of peak capacity because of these factors.
The average purchase loan origination amount increased to an all-time high of $286,000 in the second quarter of 2017.
“As a result of growing average loan amounts for purchase originations, the total dollar amount of purchase originations is higher than averages seen from 2000-2003, prior to both the peak in home prices and the Great Recession that followed,” Graboske said. “This is partly due to rising home prices, but also comes as a result of an all-but-total absence of second lien usage for purchases, a shift toward high-dollar/low-risk loans among non-agency lenders and a higher share of cash purchases at the lower end of the market.”